COVID-19 is the IMF’s Chance for Redemption

After decades of failing to fulfill the explicit purpose for which it was created, the International Monetary Fund now finds itself uniquely positioned to facilitate a globally coordinated response to the COVID-19 crisis. But to make good on its potential, the Fund first needs to abandon some bad old ideas.

NEW DELHI – The COVID-19 pandemic has thrust the entire world – rich and poor – into uncharted territory, prompting extraordinary policy responses almost everywhere. The looming economic fallout will be more severe than that of the Great Depression, the 2008 global financial crisis, and perhaps even the two world wars. After all, none of these previous epochal crises involved a simultaneous global collapse of both demand and supply, with little certainty of how long the sudden stop would persist.

In an already unequal world, the COVID-19 meltdown has further increased inequalities within and among countries. Developing countries (even those with very few coronavirus cases) are being economically and financially devastated by collapsing global trade, sharp capital-flow reversals, and currency depreciation, all of which intensify external debt-servicing problems.

Moreover, policy responses within countries have compounded existing inequalities. In India, for example, the Modi government’s inept, draconian response is forcing millions of vulnerable people out of cities and back to their native villages, generating a gratuitous humanitarian catastrophe on top of the underlying COVID-19 crisis.

An unprecedented global challenge demands an unprecedented response, including a globally coordinated health strategy, because the coronavirus will remain a threat as long as infections are still spreading in even one country. Sadly, the response so far has taken the opposite form: the world is in the grips of a competitive struggle over basic items like face masks, medicines, and testing kits – with the world’s most powerful country leading the race to the bottom. Worse, the pandemic’s terrible health implications could well be dwarfed by the sheer scale of the economic disaster and its effects on livelihoods and other health conditions.

Rather than wringing our hands, we must start preparing to do whatever it takes to prevent an even deeper catastrophe. Given the urgency, we will have to make do with the tools we have available. Despite their flaws, existing international institutions must be made fit for purpose to meet this crisis. We cannot repeat the mistakes made after the 2008 financial crisis, when governments and the international community rescued global capitalism’s biggest players without imposing conditions to ensure socially responsible behavior.

The existing international financial architecture enables three measures, in particular, that deserve immediate consideration. First, the International Monetary Fund should be preparing a massive issuance of new Special Drawing Rights (SDR), its supplemental reserve asset. Second, policymakers should be making plans for significant debt restructuring, including substantial relief for sovereign debtors in low- and middle-income countries. And, third, governments should be considering new, tighter capital controls to prevent financial markets from exacerbating the COVID-19 fallout in emerging markets.

Subscribe to Project Syndicate

Enjoy unlimited access to the ideas and opinions of the world's leading thinkers, including weekly long reads, book reviews, and interviews; The Year Ahead annual print magazine; the complete PS archive; and more – all for less than $2 a week.

Subscribe Now

Given that the IMF would play a critical role in all three of these policy domains, it must step up to the plate. That means abandoning both its longstanding inclination toward unnecessary austerity and its instinctive commitment to protecting the interests of financial players over those of ordinary people. It also means clearly repudiating misplaced political gestures like denying Venezuela access to its own SDR account at the IMF.

On the issue of SDRs, a massive new issuance would provide reserve assets to supplement struggling countries’ official foreign exchange reserves. At least SDR1-2 trillion, equivalent to $1.4-2.7 trillion (the value is based on a basket of five leading fiat currencies), will need to be created and distributed without conditionality across member countries, according to their quotas.

Advanced economies with reserve currencies will not need this lifeline, but it will be crucial in emerging and developing economies, which have far fewer resources with which to fight the pandemic and mitigate the attendant economic disaster. An expanded SDR is also a better option than swap lines from the US Federal Reserve. Although this mechanism is currently playing a stabilizing role in the global financial system, how it functions ultimately reflects US strategic national interests, not global ones.

Historically, only around SDR204 billion has been created and distributed globally, with SDR182 billion of that coming in 2009 to help countries cope with the aftermath of the 2008 crisis. These are tiny sums, relative to annual global transactions. In 2018, global trade alone amounted to around $19.5 trillion, and gross capital flows to more than $20 trillion. A massive increase in SDRs right now would increase global money supply, but need not lead to global inflation, especially if the newly unlocked resources go toward preventing supply bottlenecks that are bound to emerge as a result of the pandemic lockdown.

Similarly, while some countries can seek to repudiate external debts on the basis of today’s extraordinary circumstances, individual countries that do so on their own will face additional costs, just as they will find it difficult to impose the necessary capital controls. Both of these options would be much more effective with international coordination. While the IMF is still the institution best placed to facilitate that, it needs to abandon its market fundamentalist insistence on capital-account liberalization and deregulation.

It is hard to imagine a more appropriate moment for the IMF to change its ways – indeed, it is now or never. When the Fund was created in 1945, its explicit purpose was “to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world.” For decades, the IMF’s record on all of these fronts has been dismal. Now that the world economy is on the brink of collapse, it has a chance to atone for its past sins and finally justify its existence.

Support High-Quality Commentary

For more than 25 years, Project Syndicate has been guided by a simple credo: All people deserve access to a broad range of views by the world's foremost leaders and thinkers on the issues, events, and forces shaping their lives. At a time of unprecedented uncertainty, that mission is more important than ever – and we remain committed to fulfilling it.

But there is no doubt that we, like so many other media organizations nowadays, are under growing strain. If you are in a position to support us, please subscribe now.

As a subscriber, you will enjoy unlimited access to our On Point suite of long reads and book reviews, Say More contributor interviews, The Year Ahead magazine, the full PS archive, and much more. You will also directly support our mission of delivering the highest-quality commentary on the world's most pressing issues to as wide an audience as possible.

By helping us to build a truly open world of ideas, every PS subscriber makes a real difference. Thank you.

Jayati Ghosh is Professor of Economics at Jawaharlal Nehru University in New Delhi, Executive Secretary of International Development Economics Associates, and a member of the Independent Commission for the Reform of International Corporate Taxation.

The points are well made. The timing isn't productive. Institutional reform takes years or decades of persistence during the 'good' times.

It takes careful contemplating of the details, not just high level pronouncements. Limitations defined by the Article of Agreements are not a matter of mere inconvenience. They are binding constraints.

Article XVIII Section 3 certainly leaves the door wide open for an increase in SDR allocations.

It is a highly inefficiency policy.

First, it is exceptionally slow. An agreement today would not be finalized for months and there are no "exigent circumstances" provisions to avoid this fact. We have a live example in 2009. The SDR expansion agreed in April 2009 was finalized September 9 2009, long after it was needed.

Second, in a time when policy is aiming to leverage existing resources, SDR allocations do the opposite. Take Turkey as an example, as they currently have a BOP problem. A $1 trillion increase in the SDR allocation would raise Turkey FX reserves by a bit more than $5 billion. It is not zero. For practical purposes, it is irrelevant and precisely why Turkey continues to hold more than 90% of its allocation of SDR. It is not a relevant source of liquidity.

There simply must be more creative, flexible and immediate ways of getting US dollar liquidity to the countries who desperately need it. Mechanism to leverage existing SDR allocations in a vehicle separate to the IMF would seem far more promising and timely.

New Comment

It appears that you have not yet updated your first and last name. If you would like to update your name, please do so here.

Pin comment to this paragraph

After posting your comment, you’ll have a ten-minute window to make any edits. Please note that we moderate comments to ensure the conversation remains topically relevant. We appreciate well-informed comments and welcome your criticism and insight. Please be civil and avoid name-calling and ad hominem remarks.

Mass protests over racial injustice, the COVID-19 pandemic, and a sharp economic downturn have plunged the United States into its deepest crisis in decades. Will the public embrace radical, systemic reforms, or will the specter of civil disorder provoke a conservative backlash?

For democratic countries like the United States, the COVID-19 crisis has opened up four possible political and socioeconomic trajectories. But only one path forward leads to a destination that most people would want to reach.

Log in/Register

Please log in or register to continue. Registration is free and requires only your email address.

Emailrequired

PasswordrequiredRemember me?

Please enter your email address and click on the reset-password button. If your email exists in our system, we'll send you an email with a link to reset your password. Please note that the link will expire twenty-four hours after the email is sent. If you can't find this email, please check your spam folder.